As a commercial tenant, your company’s bottom line depends largely on how you handle the acquisition of new properties or the renegotiation of existing leases. Because, after human capital costs, one of the most significant expenses you will face is the cost of leasing commercial space. So, there’s no room for mistakes. Especially, with potentially dozens to upwards of a hundred leases to manage, it can be a daunting task to keep track of all the moving parts in today’s rapidly changing commercial real estate market, especially because extra costs across portfolios add up quickly.
Luckily, there are many strategies that commercial tenants can use to negotiate better terms, reduce excess square footage, and save money on their corporate leases. Read on to learn how.
1. Maximize the Value of Your Tenant
Whether negotiating a new lease or a renewal, the key to reducing your commercial real estate costs by getting the optimal lease is creating competition among other landlords. And the way to create sufficient competition and leverage is with the proper due diligence.
Your landlord will be more incentivized to offer you a better deal if they know that others are vying for your business.
Performing due diligence when searching for commercial properties is absolutely necessary to find a sufficient number of sites. A target goal of 50+ potential properties will drive up the likelihood of maximizing the value of your tenancy with the best property, terms, and price. Unfortunately, this is obviously an incredibly time-consuming process is simply not feasible for most busy executives.
That is why working with a true tenant representative is so critical. You need to trust that you're seeing enough sites and that they're truly the best options for you. But, you can never be sure of these critical factors if you're associated with a broker who also represents landlords. Learn What a True Tenant Rep is and How to Avoid Conflicted Brokers
But regardless, make sure you give yourself enough time generate sufficient competition. Because when you're negotiating a lease, there are many factors that can impact the final price you pay, including the length of the lease, the size of the space, and the location. Learn more critical factors tenants should be aware of that are necessary to finding the optimal office space in the free course below.
2. Understand Your Leverage and Position in the Market
The other key factor that determines your total cost is you, as the tenant. Before entering into negotiations, assess your leverage as a tenant. Your creditworthiness and potential lease will dictate how much ball your landlord is willing to play. A tenant's own financial stability and leasing history can also impact their bargaining power. Landlords may be more willing to offer better deals to established tenants with a strong leasing history and a solid financial standing.
Commercial Real Estate deals do not exist in a void.
Consider other factors such as market conditions and vacancy rates affect the desirability of your business as a tenant. Being prepared with comparable numbers or offers is crucial in negotiating affordable rates with landlords. By proving that their offer is above other options, you can incentivize them to meet you halfway. In some markets, you may have stronger leverage than others where you can negotiate more aggressively for favorable lease terms.
3. Know Which Costs Are up for Debate
When negotiating, there are certain key points on the table. If properly handled, they are the key to reducing the overall cost of your lease.
a. Base Rent
Base rent will likely be the most negotiable factor in your lease because there is a lot of room for it to be influenced by market conditions, the proposed length of your tenancy, renovations needed, etc.
Aim to negotiate a lower base rent or seek concessions such as a rent-free period, which can offset the first-year costs of a lease.
b. Rent Escalation
To control costs and provide budget certainty while avoiding unexpected, expensive cost increases negotiate for a lower annual rent increase percentage or propose a fixed rent for the lease term.
There are four types of rent escalation seen commonly in commercial real estate leases. (They are noted below). Tenants looking to cut costs should steer clear of escalations according to the CPI as their budget will be vulnerable to volatile shifts in inflation. We bet that if you're several years in an existing lease escalating according to the CPI, you're kicking yourself right now (at the very least).
Learn more about How to Negotiate a Favorable Rent Escalation Clause.
Opting for different escalation methods will have a significant influence on the total NPV of your lease.
c. Tenant Improvement Allowance
Negotiate for a higher tenant improvement allowance or request that the landlord carry out specific improvements on your behalf. This reduces your out-of-pocket expenses for customizing the space to suit your needs. If you are negotiating a work letter with your landlord, it should cover (at a bare minimum) the cost of transforming the space to a habitable warm, vanilla shell. This is critical because any costs incurred beyond the allowance will likely be amortized and tacked onto the total value of your lease going froward.
d. Operating Expenses
Look for opportunities to reduce your operating expenses. This may include reducing your energy usage or opting for a more environmentally-sustainable power source. Note: This will be dependent on your landlord and their building, but regardless tenants should be prepared to know how new green standards will influence their budgets. Read: How Commercial Tenants can Protect their Budget from Green Restrictions.
Operating expense negotiations are limited mostly because vendors set respective prices. Depending on whether you have a triple net or gross lease, your landlord will pass-through these costs or escalations to you. Still a main point to consider with gross leases is that your landlord will usually include a property management fee among the operating expense charges. What they charge you for property management is within their direct control, so you have the power to negotiate.
e. Maintenance and Repairs
Commercial leases often require tenants to pay for maintenance and repairs. Tenants can negotiate for the landlord to take on more responsibility for maintenance and repairs, which can save significant costs in the long run. This is going to be especially important for tenants with triple net buildings in older leases. Unexpected repairs can add up, becoming expensive quickly especially if you have no financial safeguard against them.
4. Optimize Your Footprint
Another way to cut costs with your office lease is to optimize your footprint. Many companies lease more space than they need, either because they're planning for future growth or because they're not sure how much space they'll need. However, leasing too much space can be a significant drain on your resources, as you'll be paying for space that you're not using. Unfortunately, many tenants are suffering this fate right now, stuck in pre-pandemic leases that didn’t account for office occupancy according to hybrid schedules.
If this is you, and your pre-pandemic lease is ending and you are looking for new space, or if you’re in a position to renegotiate with your existing landlord, this could be an excellent cost-cutting method. Streamline your footprint so you don’t need to pay for extraneous space.
You can analyze your space utilization and identify opportunities to optimize your portfolio and reduce excess square footage. This can include subleasing unused space, consolidating offices, or even transitioning to a flexible or shared workspace model. This process is known as Right-sizing. Learn How to Combat Inflation by Right-sizing Your Commercial Spaces.
5. Widen Your Geographic Net
Remember when we said keep an eye on your position in the market? We didn’t mean just in your respective neighborhood. There’s a world of deals ready at the fingertips of commercial real estate professionals who are willing to find them.
So, in addition to optimizing your footprint, another way to cut costs in your office lease is to relocate to a more business-friendly area. Depending on your industry and your company's needs, there are likely areas where real estate prices are more favorable or where you can take advantage of tax incentives or other benefits.
Texas has been named the Chief Executive’s Best State for Business for 18 consecutive years.
Moving to an area where the power of the dollar carries you further will take some strain on your EBITDA and generate savings across multiple cost considerations. Learn the Best States for Business.
6. Work with a Tenant Rep
One of the best methods to cut costs in a commercial lease is by working with a true tenant representative. A true tenant representative is a broker who exclusively represents the interests of the tenant, not the landlord. They provide unbiased market intelligence and increase the competition for your tenancy which in turn enables them to drive harder deals and cost-cutting measures.
By working with a tenant representative, you can leverage their expertise and industry connections to negotiate the best possible terms for your lease. This can include getting more favorable lease clauses, securing lower rent, and even negotiating tenant improvement allowances that can help offset the costs of building out your space.
Ultimately, cutting costs in your office lease requires a combination of strategy, negotiation, and creative thinking. By working with a tenant representative, you can take advantage of their expertise and industry knowledge to secure better terms and pricing, optimize your portfolio, and relocate to more business-friendly areas.
Cut Costs in Your Commercial Lease
With bank collapses looming, it's more important than ever for corporate tenants to be prepared to cut costs in their commercial leases. By understanding lease terms, rental rates, market conditions, and working with a true tenant representative, tenants can save money and optimize their lease agreements. Don't let costly mistakes or missed opportunities affect your bottom line.
With the right approach, you can reduce your real estate expenses and position your company for long-term success. Take control of your commercial lease and start cutting costs today by reaching out to a True Tenant Representative™ at iOptimize Realty®. Working with a True Tenant Rep™ ensures that you have an expert on your side who will provide unbiased guidance and negotiate on your behalf. We can help you find better deals, leverage the market by starting early, and avoid costly mistakes when negotiating your lease.